In the aftermath of the coronavirus pandemic, there have been numerous discussions with regard to the likely beneficiaries of companies wanting to shift from China. In the aftermath of the trade wars, bulk of companies wanting to relocate from China shifted to Vietnam (according to a report, in the period between October 2018 and August 2019,26/56 companies relocated from China to the ASEAN nation) three companies shifted to India.
In the midst of the pandemic, Indian states have been trying to woo potential investors, by offering incentives and reforming labour laws, dubbed as ‘archaic’ by many and cited as the main obstacle to Foreign Direct Investment. It remains to be seen whether these steps will be enough to convince companies to relocate from China.
While in the midst of the current tensions with China, all attention is focused on bringing down the situation across the LAC some steps, such as imposition of higher tariffs on Chinese goods, are likely to be taken to reduce dependence upon Chinese imports and also discourage Chinese participation in infrastructural projects.
As New Delhi seeks to reduce its economic dependence upon China, it also needs to benefit in terms of drawing not just greater FDI, but also strengthening trade relations with potential allies. New Delhi also needs to keep a close watch on steps being taken by competitors like Vietnam which could impact the Indian economy.
One such step taken is the ratification of an FTA with EU, by Vietnam’s national assembly on June 8, known as the EU-Vietnam Free Trade Agreement (EVFTA). The FTA, an ambitious one seeks to remove a whopping 99% of customs duties between EU and Vietnam.
Once the EVFTA becomes operational, and EU begins to remove tariffs for the ASEAN nation, Indian exporters believe that they would end up losing key markets for certain products. According to the Federation of Indian Export Organisations (FIEO) Indian exports of footwear, garments, marine products and furniture to EU,are likely to be adversely affected once the EVFTA comes into place.
If one were to look at exports in the above areas. In footwear, Vietnam’s exports to EU are estimated at $7.5 billion, while India’s exports are $1.6 billion (currently tariffs on Vietnam’s exports are 8%). In furniture, India’s exports were 900 Million, USD while Vietnam’s were estimated at 1.5Billion USD (Vietnam’s furniture exports are likely to witness a significant rise, when import duty of 6% is removed). It would also be pertinent to point out, that in recent years, Vietnam’s exports to EU have almost caught up with India’s (Vietnam’s exports were estimated at 53 Billion USD, while India’s exports to EU were estimated at 58 Billion USD).
India too has been looking to sign an FTA with the EU, but there have been issues such as market access, as well as labour, sustainability. It has been argued, that India needs to see its own interests, and can not go ahead with the FTA without it’s market access issues being addressed. The FIEO on the other hand is urging the government to expedite the FTA with EU, so as to ensure, that Indian exporters do not lose markets in the regional bloc to Vietnam.
Vietnam as a competitor
While it is true, that India can not be hasty in signing an FTA with EU. New Delhi should pay close attention to two facts. First, it needs to strengthen trade links with the EU and given the fact that the regional bloc is keen to reduce dependence upon China, this is the right time to bolster economic linkages and also ensure that it does not lose out to other countries.
Second, India needs to move beyond rhetoric and realize that in a post corona world, it is not a default option for foreign investors. When it comes to attracting overseas Investors, India is facing strong competition from Vietnam. Due to its geographical location, investor friendly policies and the FTA with the EU, Vietnam will emerge even stronger.
Vietnam, which is the ASEAN Chair for 2020, is also likely to benefit from its handling of the pandemic, easing out of lockdown restrictions and resumption of economic activities. The South East Asian nation is also likely to cash in on the fact, that it is the ASEAN chair for this year, and an important member of the 11 member CPTPP (Comprehensive and Progressive Agreement for Trans Pacific Partnership).
India has its task cut out not just in terms of drawing FDI, in a post corona world, but also enhancing trade with other countries. New Delhi needs to cash in on the opportunities, and this will require imaginative thinking. The goal of emerging as an economic hub and reducing dependence upon China needs to be backed up by sound policies. New Delhi also needs to realise that in a post corona world, strategic convergence will not translate into economic cooperation.